Zuning the AHRA

So Microsoft decides to give Universal, the biggest player in the Big Music cabal, a percentage of Zune sales that has so many zeroes after the decimal point that it effectively amounts to, well, zero. And Universal’s music chief, Doug Morris, is quoted as saying this zero amount is one way to make up for some of the lost revenue from alleged copyright infringement. This deal and Morris’ comments are so ridiculous that they do not warrant even a cursory comment.

But, as always, what is important here is the back story.

The Audio Home Recording Act (AHRA) is nearing its 15th anniversary, and this is why this story is important. In 1992, about the time Big Music really began putting resources behind the “piracy” frame, the record labels got Congress to agree to pass AHRA, a bill that may have been the first act of Congress to codify digital rights management into law. AHRA also levied a royalty tax of up to $8.00 per new digital recording machine and 3 percent of the price of all blank recording media. AHRA was one large, contributing factor that led to the demise of digital audio tape technology and the media that support it.

Fast forward to Microsoft’s offer of “tribute” to Universal. As we see it, here we have one of the most powerful companies on the planet volunteering its own, contemporary version of AHRA. Of course, the royalty numbers are low. But the royalty almost certainly will rise. As the royalty rises, a few interesting things likely will occur. First, Big Music will beseech Apple to match Microsoft’s “tribute.” Second, Apple chairman Steve Jobs is likely to respond by rubbing the bridge of his nose with his middle finger.

Third, such a response is sure to anger the labels, who will try to force Apple (and other portable digital music player manufacturers) to pay this fee by whining to Congress about how artists are being cheated. This whine will likely be followed by the usual suggestion: amend the copyright laws. In this case, the labels will ask Congress to require all digital music device manufacturers to pay a fee for each unit sold. The easy, ceremonial way to do this is to modify AHRA to include digital music devices.

(And don’t think having a Democratic Congress will keep this from happening. In fact, the Democrats’ traditional coziness with entertainment interests may quicken this occurrence. Remember, a Democratic president signed the DMCA.)

Here’s where things begin to get interesting from a business strategy standpoint. Apple does not have nearly the same amount of cash as Microsoft, and therefore would balk at paying a device “tribute” to the labels on sheer economic grounds. Apple also would balk at the tribute on other grounds: without Apple’s introduction of the iPod and iTunes, one could argue that there might be no digital music market. And since Apple created the market for portable, legal, downloadable music, why would it want to pay out to the labels?

But, we don’t think Microsoft’s move has anything to do with promoting the Zune, or even challenging the iPod. Instead, we think Microsoft made this move as a challenge to Apple’s dominance in personal media, an advantage that will continue to threaten Microsoft for years to come if the Redmond company does not address it now.

Microsoft’s traditional income stream has been from the desktop (including desktop extensions into the enterprise). This income stream, however, currently is being threatened by Google’s attempts to make the Web a primary computing and application platform. On the other hand, Apple has leveraged the iPod into an increased presence in the home, as both novices and “prosumers” choose the Apple for its ease of use and bundled, inexpensive creation tools. (Next time you’re on a college campus, notice how many more people are using Macs instead of Windows-based computers. The change over the last three years is astonishing.) With more powerful and affordable tools, programs, and distribution methods, more people are taking control of their content creation. This trend has helped not only Apple, but Flickr and YouTube, among other companies.

So if you’re Microsoft, you see that your desktop advantage being whittled away over the next 25 years, and you see the home market slipping away, too. What do you do? You pick a fight with Apple, since the perception is it doesn’t have the financial resources to get down and dirty for an extended period of time. (Microsoft’s cash war chest totals more than $28 billion, more than twice Apple’s cash reserve of a bit more than $10 billion.) Picking this fight could include supporting AHRA amendments that force music player manufacturers to pay royalties, something Microsoft would gladly — even to its own detriment — if it meant halting (or at least slowing down) Apple’s five year run of en fuego innovations.

Regardless of its reasons for doing so, the payment to Universal is a strong tactic by Microsoft. But it has little to do with music, and absolutely nothing to do with compensating artists because of alleged lost sales due to downloading. It will be interesting to see how this plays out, but certainly count on Big Music to amend AHRA, or draft new legislation that is consistent with AHRA’s spirit.